Bain and Chinese Company to Acquire 3Com

Saturday

3Com, the computer networking company, said Friday that it had agreed to be acquired by Bain Capital Partners in an arrangement that also gives a Chinese company a minority stake in the company.

3Com, an unprofitable computer networking company, said yesterday that it had agreed to be acquired by Bain Capital Partners for $2.2 billion in cash in an arrangement that also gives a Chinese company, Huawei Technologies, a minority stake in the company.

The deal means the end of an era for a storied Silicon Valley company that has stumbled in recent years in the face of more nimble competitors like Cisco and Nortel.

It also provides yet another test case for Washington lawmakers wary of high-technology deals with Chinese companies that they think could compromise American security.

Edgar Masri, 3Com’s president and chief executive, said the buyout would help make 3Com more competitive. “Going private will give us more flexibility,” he said. “We will be able to focus on our long-term strategic objectives.”

Mark Sue, an analyst with RBC Capital, said 3Com had “struggled with execution and inconsistency” for so long that he doubted going private would solve its problems. “Battling a strong Cisco in the enterprise may prove increasingly difficult,” Mr. Sue said in a research note yesterday. He said Huawei appeared to have the most to gain from the deal.

Under the terms of the deal, 3Com shareholders will receive $5.30 in cash for each share of 3Com stock, a premium of about 44 percent over 3Com’s $3.68 closing price on Thursday. 3Com shares rallied $1.26 a share, or 34 percent, to close at $4.94. The deal, if approved, is expected to close in the first quarter of next year.

3Com executives said the size of Huawei’s stake in the company would be disclosed in a few weeks.

Late last year, 3Com spent $822 million to buy Huawei’s share of a joint venture between the companies. 3Com and Huawei had formed the venture, known as H3C, in 2003 to broaden 3Com’s reach in Asian markets while giving Huawei access to American customers.

Mr. Masri said the company had considered competing offers from several other companies, but selected Bain in part because of its experience in Asia. 3Com employs 6,000 people, most of them in Asia.

3Com, which in recent years has had its headquarters in Marlborough, Mass., was one of the fastest-growing Silicon Valley companies in the late 1980s as computer networking caught on among corporations.

The company grew rapidly through the late 1990s, and at the height of the Internet boom in 2000, 3Com’s stock price rose briefly above $100 a share, only to plummet in the dot-com bust and as a result of management gaffes.

Among those problems was the 1997 acquisition of the modem maker U.S. Robotics and its Palm Computing operation, maker of a line of hand-held electronic organizers. 3Com’s Palm business was seen on Wall Street as a distraction from 3Com’s core businesses, and in 2000, 3Com spun off Palm as separate public company that now makes the Treo line of smartphones.

Since then, 3Com has continued to fall further behind its rival Cisco, which has aggressively acquired technology it needed to keep ahead of other competitors. 3Com, with revenue last year of $1.3 billion, has not posted a profit for six years.

The proposed sale is almost certain to attract close scrutiny in Washington, where Huawei has long attracted suspicions over supposed links to China’s military and intelligence agencies. The company’s reclusive founder and president, Ren Zhengfei, is a former Chinese army engineer.

Michael R. Wessel, a commissioner of the United States-China Economic and Security Review Commission, which was created by Congress to monitor bilateral relations, said that the federal government’s Committee on Foreign Investment in the United States “should take a hard look at this transaction” before allowing Huawei to buy part of 3Com.

Mr. Wessel, who also criticized the Chinese company Lenovo’s acquisition of I.B.M.’s personal computer business three years ago, pointed to reports this month that Chinese hackers had tried to penetrate military computer systems at the Pentagon and in Britain. He said that Huawei’s control of an important network security provider like 3Com would raise national security issues.

If the 3Com deal becomes controversial, as did a bid by Cnooc Ltd. of China for Unocal two years ago or DP World’s effort last year to acquire control of American port facilities, then the transaction may also draw attention to Bain Capital in the race for the Republican presidential nomination.

Mitt Romney, a candidate for the nomination, was the chief executive of Bain Capital for 15 years before his successful run in 2002 to become governor of Massachusetts. His financial disclosure form last month showed that he and his immediate family earned more than $8 million last year from Bain Capital, with stakes in more than 30 Bain Capital funds.

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